8 Techniques To Protect Volatility In Your Portfolio

  • 14 May 2024
  • Read 7 mins read

Portfolio Protection: 8 Strategies To Protect Your Goals in Volatile Markets

It is said that in the stock markets, volatility is inevitable. It does not matter which sector you are invested in; at some point, you would be exposed to high levels of volatility. For instance, IT was once seen as a stable sector but has seen huge volatility in the last 3-4 years. Similarly, sectors like private banks, capital goods and even FMCG stocks have been exposed to volatility. How can investors protect their portfolios from volatility? While there are no golden rules, here are 8 techniques that can help you manage market volatility much better.


1. The best bet against volatility is quality

In the last 20 years, several stocks like HDFC Bank, Reliance Industries, Hindustan Unilever, Kotak Bank and Eicher Motors have shown consistent performance in terms of growth and margins. Even in the worst of times, amidst elevated levels of volatility, these stocks have protected value. When you find the index behaving in a volatile manner, one way is to use lower levels to shift to quality stocks with long-term sustainable business models.

2. Rallies hardly repeat, at least not in quick succession

There is one underlying truth about rallies. No two rallies are driven by the same set of stocks. For instance, the rally of 1992 was led by cement and the rally of 1999 was driven by technology and telecom stocks. In 2007, it was all about real estate and infrastructure and in 2014 was all about pharma. The story keeps changing, but the moral of the story is that if a sector has rallied sharply and then got volatile, don’t expect the rally to repeat.

3. If volatility gives you new lows, do some bottom fishing

This is a rather brave strategy but then what is investing if you don’t make the best of god-gifted opportunities. While everything about volatility is true, it is also true that some stocks will never disappoint you if you buy at lower levels. Classic examples are stocks like Britannia, Asian Paints,  Bajaj Auto, Bajaj Finance etc. The challenge is to have liquidity at new lows, but if you have that liquidity, make the best of it for bottom fishing. Remember to buy in tranches and don’t just go the whole hog.

4. You can hide behind dividend yield stocks

Did you know that high dividend stocks automatically gives you price protection. Normally, stocks would not go below 5% dividend yield price in most cases, although there may be exceptions. Unless the sector is totally out of favour or you have reasons to doubt the financials, use volatility to accumulate dividend yield stocks. It is a good safety measure, protects your wealth and also gives you a regular income in volatile times.

5. Interestingly, asset allocation has most of the answers

Are you clear about asset allocation? You need a rule-based approach to asset allocation. Here is how it works. If the stocks move up and equity allocation goes up beyond the limit then you are automatically pushed towards debt. Similarly, if the debt portfolio has appreciated due to falling rates, then automatically more money gets allocated to equities at lower levels. This ensures two things. You are fully invested at the top and fairly liquid at lower levels.

6. Lock in profits using the power of futures

The shortcoming of this approach is that it only works for the 192 stocks available in futures, but that is good enough. By selling futures at higher levels, you not only lock in profits but also indirectly monetize gains. When you sell futures against your cash market positions, then you are locking in the profits. Now, irrespective of what happens to the stock price you have the assurance of locked-in profit. The smarter thing to do is to keep rolling over the short position each month and earn spread income on that.

7. Hedge your downside risk with options

This is fairly simple. Buy lower put options to lock in maximum losses. This is not a profit-making strategy, but it pegs your downside risk. That is a great asset in volatile times. This strategy has a cost in terms of premium paid, but it is worth the effort if you are going to protect your downside. Often, traders use index options to protect the entire portfolio.

8. In a volatile market, nothing wins like diversification

The more you spread across stocks and asset classes, the less you have to worry about cycles in the market. You can diversify stocks across sectors and themes. Alternatively, you can also diversify across other asset classes like debt, gold, REITS etc. Specifically, gold can be a great hedge in uncertain times.

As Euclid said, there is no royal route to geometry, so also there is no royal route to managing volatility. But spreading your bets can surely help.